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Edited version of private ruling
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Ruling
Subject: Royalties
Question:
Are royalties levied by nurseries on the sale of propagated trees part of the capital cost of establishing horticultural plants?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You are developing part of your horticultural property to include new varieties of trees.
The invoice that you received for the new varieties of trees includes an amount for royalties.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 40-545.
Reasons for decision
A deduction is available to the taxpayer who owns and uses plants, or holds them
ready for use, to produce assessable income in a business of horticulture.
Taxation Determination TD 2006/46 states that the costs of establishing horticultural
plants include the cost of:
(a) purchasing plants or seeds;
(b) preparing to plant, including ploughing, top dressing, fertilising, top soil enhancement, soil analysis tests, forming up planting rows and planting site surveys that are attributable to the establishment of a horticultural plant;
(c) planting the plants or seeds;
(d) pots and potting mixtures (for potted plants);
(e) grafting trees; and
(f) establishing plants used for associated purposes, such as for companion planting (if those plants are not horticultural plants in their own right).
The determination also states that establishment expenditure extends to the cost of maintaining plants until they are ready to be planted, because the dominant purpose of the expenditure is to preserve and improve the plants until they are ready to be used, by planting or establishing them in their long-term growing medium.
Establishment expenditure includes only capital expenditure. Costs in acquiring plants and planting them to establish or extend a plantation are capital in nature.
In your case, you have purchased plants which have a royalty payment included in the purchase price of each plant. The royalty payment is directly linked to the purchase of the plant. The royalty component is included in the cost of purchasing the trees and therefore forms part of the costs of establishing horticultural plants. The royalty is capital in nature.
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